Carve-Outs from IFRS

&
Key Clarifications brought in by ITFG

December 24, 2016

FCA. Mrinal Tayal

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 Table of contents

Description Page #

Section 1 – Key carve-outs in Ind-AS 3-5

Section 2 – Key Clarifications in ITFG 6 - 19

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 Section 1 – Key carve-outs in Ind-AS

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 Key carve-outs in Ind-AS (1/2)
Accounting area Ind AS carve-outs
Previous GAAP Ind AS 101 specifies previous
GAAP as the GAAP applied by
companies to meet their reporting
requirements in India immediately
before Ind AS i.e. existing notified
standards
Foreign currency Recognition of embedded foreign
convertible bonds - currency conversion option as
treatment of conversion ‘equity’
Option
Employee benefits – Mandatory use of government
discount rate securities yields for determining
actuarial liabilities
Business acquisitions – Recognition of ‘bargain purchase
gain on bargain purchase gains’ in a business combination as
‘capital reserve’
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IFRS requirements
Previous GAAP is the basis of
accounting that a first-time
adopter used immediately
before adopting IFRS
Conversion option can also be
treated as derivative and
carried at fair value
Requires use of corporate
bond rates as default
‘Bargain purchase gains’ in a
business combination
recognised as income in the
statement of profit and loss
 Key carve-outs in Ind-AS (2/2)

Accounting area Ind AS carve-outs IFRS requirements

Classification of loan with
covenant breaches
Lease rental recognition
Foreign exchange
fluctuations
Entities to continue classifying
loans as noncurrent even in case of
breach of a material provision if,
before the approval of the financial
statements, the lender agreed not
to demand payment
No straight-lining for escalation of
lease rentals in line with expected
general inflation
Option to defer exchange rate
fluctuations on long-term foreign
currency monetary items existing as
at the transition date
Loans reclassified as ‘current
liability’
Requires straight-lining of
lease rentals
Requires recognition of
exchange rate fluctuations on
long-term foreign currency
monetary items in the
statement of profit and loss

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 Section 2 – Key Clarifications in ITFG

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 Background - ITFG

Background
 With Indian Accounting Standards (Ind AS) being applicable to large
corporates from 1 April 2016, the Institute of Chartered Accountants of
India (ICAI), on 11 January 2016 announced the formation of the Ind
AS Transition Facilitation Group (ITFG) in order to provide clarifications
on issues arising due to applicability and/or implementation of Ind AS
under the Companies (Indian Accounting Standards) Rules, 2015
(Rules 2015).

 Till date 6 ITFGs have been issued:

1. Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 1

2. Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 2

3. Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 3

4. Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 4

5. Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 5

6. Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 6

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Key Clarifications in ITFG 1
Background

The ITFG held its first meeting on 16 January 2016 and has issued its first bulletin (Bulletin I) on 11 February 2016 which provides
guidance on certain issues relating to the application of Ind AS.

The year from which a company would be required to comply with Ind AS based on the thresholds of net worth as
defined in the Ind AS road map i.e. if a company meets the threshold of net worth in a particular financial year, then
Ind AS would be applicable to such a company immediately in the next financial year. The summarised applicable
dates for adoption of Ind AS are:

Companies meeting the net worth criterion of INR 500 Ind AS would be applicable from the financial
crore on the balance sheet date as at year
31 March 2014 2016-17
31 March 2015 2016-17

31 March 2016 2016-17

31 March 2017 2017-18
Companies meeting the net worth criterion of INR 250 crore 2017-18
or more as at 31 March 2017

In case of a group with subsidiaries, if a subsidiary ceases to be the subsidiary (of a parent that is covered under
the Ind AS road map) before the date of adoption of Ind AS, then depending on the subsidiary’s net worth threshold,
the subsidiary would fall in the road map of Ind AS. Additionally, if a subsidiary is sold off after the adoption of
Ind AS, then the subsidiary would continue to prepare financial statements under the Ind AS road map.

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 Key Clarifications in ITFG 1

Application of the option (under Ind AS 101, First-time Adoption India Accounting Standards) to continue with the
accounting policy under para 46A of AS 11, The Effects of Changes in Foreign Exchange Rates would be
available for those long-term foreign currency loans that were taken before the beginning of the first Ind AS
reporting period i.e. 1 April 2016 for a company falling in phase I of the Ind AS adoption road map.

A company would have to determine its functional currency retrospectively on application of Ind AS in light of no
specific exception or exemption provided in Ind AS 101.

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 Key Clarifications in ITFG 2
Issue 2

Applicability of Ind AS to an Indian subsidiary of a foreign company Company: X Ltd. and Company Y Ltd. registered in India
having net worth of Rs 600 crores and 100 crores respectively are subsidiaries of a Foreign Company viz., ABC Inc., which has net
worth of more than Rs. 500 crores in financial year 2015-16.
Whether Company X Ltd. and Y Ltd. are required to comply with Ind AS from financial year 2016-17 on the basis of net worth of the
parent Foreign Company or on the basis of their own net worth?

Since, the Foreign company ABC Inc., is not a company incorporated under the Companies Act, 2013 or the earlier
Companies Act, 1956, it is not required to prepare its financial statements as per the Companies (Indian Accounting
Standards) Rules, 2015.

As the foreign company is not required to prepare financial statements based on Ind AS, the net worth of foreign
company ABC would not be the basis for deciding whether Indian Subsidiary Company X Ltd. and Company Y Ltd.
are required to prepare financial statements based on Ind AS.

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 Key Clarifications in ITFG 2
Issue 3

Company X Ltd. has prepared its financial statements under IFRS for the first time for year ended March 31, 2016. It had adopted
its date of transition to IFRS as April 1, 2014. As per the Companies (Indian Accounting Standards) Rules, 2015, Company X Ltd. is
mandatorily required to prepare its financial statements as per Ind AS for the year ended March 31, 2017 and hence under Ind AS,
the date of transition would be April 1, 2015. Whether Company X Ltd. can select date of transition under Ind AS as April 1, 2014
instead of April 1, 2015 since it has already carried out exercise of transition on April 1, 2014 for the purposes of IFRS.

X Ltd. Is required to mandatorily adopt Ind AS from April 1, 2016, i.e for the period 2016-17, and will give
comparatives as per Ind AS for 2015-16. Accordingly, the beginning of the comparative period will be April 1, 2015
which will be considered as the date of transition as per Ind AS.

Although Company X Ltd. has already carried out exercise of transition on April 1, 2014 for the purposes of IFRS,
Company X Ltd. cannot select date of transition under Ind AS as April 1, 2014.

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 Key Clarifications in ITFG 3
Issue 4

Company B Ltd. is an associate company of Company A Ltd. Company X Ltd. is the holding company of Company A Ltd. Company
X Ltd. has decided to adopt Ind AS voluntarily from 2015-16.
Whether Company A Ltd. and Company B Ltd. are statutorily required to comply with Ind AS from financial year 2015-16?

Company X Ltd. has adopted Ind AS voluntarily from financial year 2015-16, Company A Ltd. being subsidiary of
Company X Ltd. shall comply with Ind AS from the financial year 2015-16 as per the roadmap.

In the given case, Company B Ltd. is a direct associate company of Company A Ltd. but not of Company X Ltd.
However, Company X Ltd, through its subsidiary (i.e., Company B Ltd.), has significant influence over Company B
Ltd., indirectly.

In view of the above requirements, Company B Ltd. shall also comply with Ind AS from the financial year 2015-16.

In other words, if a parent company voluntarily or mandatorily adopts Ind AS then its holding, subsidiary, joint
venture or associate company whether through direct or indirect association shall comply Ind AS from the financial
year in which the parent company starts complying with Ind AS.

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 Key Clarifications in ITFG 3
Issue 8

As on March 31, 2014, Company A is a listed company and has a net worth of 50 crore. As on March 31, 2015, the company is no
more a listed company. Whether Company A is required to comply with Ind AS from financial year 2017-18.

it may be noted that immediately before the mandatory applicability date, if the threshold criteria for a
company are not met, then it shall not be required to comply with Ind AS, irrespective of the fact that as on March
31, 2014, the criteria was met.

In the given case, before the mandatory applicable date (i.e 2017-18), Company A ceases to be a listed company.
Accordingly, it will not be required to apply Ind AS from FY 2017-18.

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 Key Clarifications in ITFG 3
Issue 14

A Ltd. (first-time adopter to Ind AS) chooses to measure its property, plant and equipment by applying Ind AS 16, Property, Plant
and Equipment retrospectively. Under previous GAAP, A Ltd. had been applying depreciation rates specified in Schedule XIV to the
Companies Act, 1956. Whether A Ltd. is required to recompute depreciation based on useful lives from the date of initial
capitalisation of property, plant and equipment or will have to apply depreciation rates applied under previous GAAP till the date of
opening balance sheet.

Ind AS 101 requires retrospective application of Ind AS effective at the end of a first-time adopter’s first Ind AS
reporting period. However, as an exception to this rule, Ind AS 101, inter alia, provides deemed cost exemption,
wherein as at the date of transition to Ind AS, a first time adopter may elect to measure all of its items of property,
plant and equipment (PPE) at the carrying amounts as per its previous GAAP.

In case the first-time adopter does not elect to choose deemed cost exemption, then the requirements of Ind AS 16
would have to be applied as if the first-time adopter had always applied the Standard. Accordingly, PPE will be
measured based on historical cost determined in accordance with Ind AS 16.

In accordance with the above paragraphs, it may be noted while transitioning to Ind AS, a first-time adopter’s
estimate of depreciation under previous GAAP can only be changed if those estimates were in error.
However, when a company has been computing depreciation as per rates prescribed under Schedule XIV of
Companies Act, 1956, then it has not estimated the useful life of an asset but has depreciated its assets as per the
minimum requirements of law.
Accordingly, when a first-time adopter chooses to measure its PPE by retrospective application of Ind AS 16, then it
will be required to re-compute depreciation by assessing the useful life of an asset in accordance with Ind AS 16
which is consistent with Schedule II to the Companies Act, 2013.

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 Key Clarifications in ITFG 4
Issue 1 & 2

ABC Ltd., which is a manufacturer of TV sets, sells a TV at Rs. 50,000 which includes excise duty of Rs. 5,000. What is the amount
to be recognised as revenue? How excise duty should be presented in financial statements? Is there any change in the
presentation of excise duty as compared to presentation prescribed in AS 9?

How revenue should be recognised in case Service Tax is collected from customer for rendering of services?

Explanation to paragraph 10 of AS 9, Revenue Recognition, specifically provides that the excise duty included in the
turnover should be shown as reduction from the gross turnover on the face of the statement of profit and loss.

Paragraph 8 of Ind AS 18, inter alia, provides that revenue includes only the gross inflows of economic
benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties
such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow
to the entity and do not result in increases in equity. Therefore, they are excluded from revenue.

Excise duty is a liability of the manufacturer which forms part of the cost of production, irrespective whether
the goods are sold or not. Therefore, recovery of excise duty flows to the entity on its own account and the same
should be included in the amount of revenue. Accordingly, in the present case, revenue should be recognised at Rs.
50,000/-

Since service tax collected represents the amount collected on behalf of a third party, viz., the government, revenue
should be net of service tax collected

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 Key Clarifications in ITFG 5
Issue 3

Ind AS has given the option to consider previous GAAP carrying value of property, plant and equipment (PPE) as deemed cost for
assets acquired before the transition date. Whether an entity has the option of fair valuing few items of PPE and taking carrying
amounts of the remaining items of PPE as the deemed cost on the date of transition?

No. In accordance with paragraph D7AA of Ind AS 101, The First-time Adoption of Indian Accounting Standards,
where there is no change in its functional currency on the date of transition to Ind AS, a first-time adopter of Ind AS
has the option to elect to continue with the carrying value of all of its property, plant and equipment as at the
date of transition measured as per the previous GAAP and use that as its deemed cost at the date of transition after
making necessary adjustments in accordance with paragraph D21 and D21A of Ind AS 101.

If a first time adopter chooses this option, then the option of applying this on selective basis to some of the items of
property, plant and equipment and using fair value for others is not available.

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 Key Clarifications in ITFG 5
Issue 5

ABC Ltd. is a first-time adopter of Ind AS from the financial year 2016-17. It had received government grant from the Central
Government during the financial year 2012-13 to purchase a fixed asset. The grant received from the Government was deducted
from the carrying amount of fixed asset as permitted under previous GAAP, i.e. AS 12, Accounting for Government Grants. ABC
Ltd. has chosen to continue with carrying value of property, plant and equipment as per the previous GAAP as provided in
paragraph D7AA of Ind AS 101. As per Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance,
such a grant is required to be accounted by setting up the grant as deferred income on the date of transition and deducting the
grant in arriving at the carrying amount of the asset is not allowed.
In this situation, whether ABC Ltd. is required to adjust the carrying amount of fixed assets as per previous GAAP to reflect
accounting treatment of the government grant as per Ind AS 20?

When the option of deemed cost exemption under paragraph D7AA is availed for property, plant and equipment, no
further adjustments to the deemed cost of the property, plant and equipment shall be made for transition
adjustments that might arise from the application of other Ind AS. Accordingly, once an entity avails the exemption
provided in paragraph D7AA, it will have to be carry forward the previous GAAP carrying amounts of PPE.

ABC Ltd. needs to apply the requirements of Ind AS 20, Accounting for Government Grants and Disclosure of
Government Assistance, retrospectively on the date of transition to Ind AS, i.e. on 1st April, 2015. The adjustments
related to the government grants should be recognised retrospectively as deferred income with corresponding
adjustments in the retained earnings on the date of transition. Therefore, it is not required to adjust the carrying
value of PPE due to the application of other Ind AS.

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 Key Clarifications in ITFG 5
Issue 7

ABC Ltd. has entered into an operating lease agreement for taking a building on lease. The rent agreement is for 5 years with
escalation of lease rent at the rate of 15% p.a. The general inflation in the country expected for the aforesaid period is around 6%.
Shall the lease payments be straight-lined or not as per Ind AS 17? If yes, should the entire 15% p.a. escalation in lease rent be
straight-lined over a period of 5 years or only the difference which exceeds the expected inflation rate will be straight-lined?

As per paragraph 33 of Ind AS 17, lease payments shall be straight-lined over the period of lease unless, inter alia,
the payments to the lessor are structured to increase in line with expected general inflation to compensate for the
lessor’s expected inflationary cost increases. If payments to the lessor vary because of factors other than
general inflation, then lease payments shall be straight-lined.

Judgement would be required to be made as per the facts and circumstances of each case to determine whether
the payments to the lessor are structured to increase in line with expected general inflation. It is not necessary that
the rate of the escalation of lease payments should exactly be equal to the expected general inflation.

In the given case, the increase of 15% p.a. in lease rentals does not appear to have any link with general inflation
which is expected to be 6%. Accordingly, the entire lease payments should be straight-lined since the increase is not
a compensation for inflation.

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 Key Clarifications in ITFG 6
Issue 4

A company received grant from government which is in the nature of promoter’s contribution and the same was included in capital
reserve. This grant has been accounted as per AS 12, Accounting for Government Grants. Is such capital reserve required to be
included for computation of net worth to assess Ind AS applicability?

As per Rule 2(1)(f) of Companies (Indian Accounting Standards) Rules, 2015 “net worth” shall have the meaning
assigned to it in clause (57) of section 2 of the Act.

From the definition of Section 2(57), it may be noted that all reserves created out of the profits are included in
calculation of ‘net worth’.

In the given case, the capital reserve has arisen pursuant to grant received from government. which is in the nature
of promoter’s contribution. On a literal interpretation of the definition, it may be concluded that capital reserve in
the nature of promoter’s contribution should not be included to calculate net worth as the same is not explicitly
mentioned in the definition of net worth.

However, in substance, the capital reserve in the nature of promoter’s contribution is a capital contribution
by promoters and should be included in the calculation of net worth. Further, Accounting Standard (AS) 12 also
states that government grants in the nature of promoter’s contribution are recognised in shareholders’
funds. Therefore, such a capital reserve should be included for computation of ‘net worth’.

it may be noted that capital reserve in the nature of promoter’s contribution should be included in the net worth only
for the purpose of Ind AS applicability.

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 Thank You
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